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Bilateral Monopoly
Sometimes a firm and a union form a bilateral
monopoly, where the firm is a monopsonist as a buyer
of labor and the union is a monopoly as a seller of
labor. The monopsonist will seek to pay the Wm wage
rate while the union will seek to get the Wu wage rate.
Who prevails will depend on who has greater market
power or who is a better negotiator. It is possible,
however, that the power of the monopsonist will be
offset by the power of the union and will instead agree
on a wage that is closer to the competitive wage, Wc,
which is higher than Wm but lower than Wu. However,
the quantity of laborers employed will probably be less
than it would be under pure competition (Qu < Qc).
Among the three types of union models inclusive or industrial union model is one of
them. Instead of limiting the membership of the unions, all the unions try to
organise all their available workers. This is true for the industrial unions, like in the
case of the automobile workers and the steel workers. Such unions seek their
members in all the available unskilled, semi skilled and skilled workers, in an
industry. A union is exclusive only when all its members are skilled craftsmen, for
whom there are not many substitutes. However, when a union is composed of
unskilled and semi skilled workers, the policy of membership restriction, would
make available to the employers, numerous non-union workers, who are highly
substitutable for union workers.
An industrial union which has virtually all the possible available workers as its
members can pressurise the firms to agree to all their demands. Since the labour
unions have legal rights to go on strikes, the labour unions threaten the firms to
deprive them of their labour supply, if their demands are not met. A firm undergoes
huge losses if the production is put on halt because of the strikes that the labour
unions call for.
We have illustrated the inclusive or industrial union model in the figure below.
Initially, in a competitive equilibrium, where the wage rate is W6, and Q6 is the level
of employment, now suppose an industrial union is formed which demands a higher
above equilibrium of wage rate, Wu. The wage rate Wn creates a perfect elastic
labour supply over the range ac, in the figure below. If the company thinks of
getting any worker in this particular range then they will have to pay wage rate
imposed by the union. If the Company decide anything against meeting the wage
rate provided by the labour union, then the firm will have to face strike from the
labour union. However, if the firm decided that it is a better option to just pay the
higher wage rate and maintain peace with the labour union, and avoid any occasion
of a strike, they will be able to cut back on the employment from the Q6 to Qu.
By agreeing to the unions Wy wage demand, the individual employers become the
wage takers. Since the labour supply is perfectly elastic over the range ac, the
marginal resource of the labour cost is equal to the wage rate Wn, over this range.
The level of employment at Qn is the result of the employers equating this MRC
(which is equal to the wage rate) with MRP, according to the profit maximisation
rule.
Note that from the point c on the labour supply curve S that Q6 workers desire
employment at the wage rate Wn. However, as indicated by the point b on the
labour demand curve Dy, only the Qu workers are employed. It results as a surplus
of labour with Q6 Qu.
Inclusive or industrial union model, by organising all the available workers in order
to control the labour supply, the industrial union can impose a wage rate Wu, which
is above the competitive wage arte Wc, this changes the labour supply curve from S
to acS. At the wage rate Wu, the employees will cut employment from Qc to Qu.